“It’s definitely something the state should be concerned about, but I think it (the scope) is exaggerated a little bit,” University of Illinois economics professor Dan McMillen said.

“Businesses like to say that they leave states because of tax issues, but businesses are not actually all that mobile, and I think it’s a lot less common for businesses to leave from tax issues as is commonly believed.”

The types of businesses that are likely to leave because of the tax hike are those that were close to leaving anyway, such as manufacturers that were already considering moving operations overseas or highly mobile Internet or technology companies, McMillen said.

That isn’t to say that Illinois shouldn’t be worried about businesses fleeing. Illinois already had a $15 billion state budget deficit, and businesses don’t like the uncertainty in a large deficit, McMillen said.

“It’s not as though Illinois had a really attractive business climate, then it raised taxes and it no longer has an attractive business climate,” he said.

Cumulative effect

Business groups say the tax hike simply made a bad climate worse for businesses.

“The threat of business leaving is very real, and I wouldn’t say it’s just because of the tax increase,” said Josh Collins, director of government relations for the Greater Springfield Chamber of Commerce.

“You have to look at the overall landscape — the property tax rate is among the highest in the country, workers’ compensation is among the highest in the country, unemployment insurance is among the highest in the country, and now the corporate income tax is among the highest in the country.”

Before the tax hike passed, its very possibility caused Springfield to lose prospective new businesses, Collins said. He wouldn’t name names but said one business that had expressed interest was in the biomedical field.

“We’ve been in conversations with businesses from other states who were looking at coming here, even before the tax increase,” Collins said. “They looked at our budget deficit and said, ‘You guys are going to have to fix it,’ and it (the state) is going to fix it on the backs of businesses.”

Profits taxed away

Local businesses have felt the effects of the poor climate. Troy Freeman, owner of design and marketing firm Dig-It-All Designs, said the possibility of leaving the state has “absolutely” crossed his mind.

“The tax (increase) hasn’t really hit us yet. We’re looking to see what the impact is,” Freeman said. “The tax thing isn’t as big an issue so much as the work climate.”

While he hasn’t made any serious movements toward relocation, Freeman said when he does business with out-of-state clients, he always asks them about the atmosphere in their states.

In terms of the tax increase, he said he’s seen paychecks getting smaller, but he’s more worried about how it will affect his customers.

“When times get tough, marketing dollars are always the first thing to go,” he said.

His firm is relatively small and portable — Freeman employs four. However, he noted, he and his co-workers have families and ties in Springfield.

Andy Van Meter employs 50 people at home and office accessory designer Design Ideas. He said he has no intention of moving his company because of his political commitment as Sangamon County Board chairman.

However, if he didn’t have that commitment, “You’d be foolish not to at least think about it (moving out of the state),” he said. “Capital (to expand business) comes from profits, and profits will be taxed away at almost twice the rate they previously were.”

Design Ideas is very portable and might be better located in other states to attract the talent it needs, Van Meter said.

Other less-portable businesses are resigned to living with the new tax structure.

Michael Higgins, owner of downtown restaurant Maldaner’s, said his establishment has been in Springfield since 1886, and “like it or not, Maldaner’s is going to be here another 120 years in Springfield.”

“It is all part of the business environment you have to deal with,” Higgins said. “It changes over the years, and so far we’ve been able to deal with that.”

Higgins also is a candidate for Springfield alderman in the April 5 election.

Not all businesses pay corporate rate

The tax hike increased Illinois’ personal income tax rate from 3 to 5 percent and the corporate rate from 4.8 to 7 percent. However, wrinkles in the tax code mean not all companies pay the corporate tax rate.

A lot depends on how a business is classified with the Internal Revenue Service. Generally speaking, small businesses, including Dig-It-All Designs and Design Ideas, pay the personal income tax rate, while larger businesses, including Maldaner’s, pay the corporate rate.

And if a company doesn’t make any profit, it doesn’t pay any income tax, either.

In 2008, 36,473 Illinois businesses paid the corporate income tax rate, while 118,040 paid the personal rate and 185,514 paid no taxes at all, according to the state Department of Revenue.

Because of the way the income tax is assessed for businesses — they pay taxes only on income they make in Illinois — even if a corporation moves its headquarters or facilities out of the state, as sandwich-maker Jimmy John’s has said it might do, it would still pay income tax to Illinois, Revenue spokesman Mike Klemens said.

The corporate tax rate used to be assessed based on a company’s property holdings, sales and payroll in Illinois versus the same in the rest of the nation. A push by business groups in 1998 caused it to be changed to sales only.

“There’s no denying that this is a significant tax increase,” Klemens said. “But the notion that a multi-state corporation will move out of state because of taxes is untrue.”

Andy Brownfield can be reached at (217) 782-3095.

Net operating loss deductions

Under Illinois’ tax increase law, net operating loss deductions, which allow businesses to deduct annual losses from future income tax payments over a period of 12 years, will be suspended for four years. Business groups view this as further worsening the state’s business environment.

“It’s a double-whammy for Illinois business — they’ll be paying more in income tax, and they won’t be able to write off their losses,” said Mark Denzler, vice president and chief operating officer of the Illinois Manufacturers Association.

“It (the deduction) helps businesses with cash flow and helps even out the business cycle over a period of time.”

The governor’s budget office said the suspension is only temporary. After the four-year period, under the new law, businesses will still be able to write off any losses they suffered.

“Overall, when we were taking a look at what measures needed to be taken in order to get the state’s fiscal house back in order, this was one of the ways … to gain some additional revenue for the state while we address the deficit,” budget office spokeswoman Kelly Kraft said.

--Andy Brownfield

What rate do businesses pay?

Businesses are generally put into two categories when paying taxes: Small businesses are classified as S-Corporations, which pay the personal income tax rate. Larger companies are classified as C-Corporations, which pay the higher, corporate rate.

Between 1986 and 2006, the most recent year for which complete records in all categories are available, the number of companies filing as C-Corporations in Illinois fell 20 percent, from 148,236 to 119,214. During the same period, the number of businesses filing as S-Corporations grew 434 percent, from 40,614 to 216,716.

The numbers above come from a different set of data that goes back further in years, while the numbers below come from the most recent data. Despite marginal differences, both are accurate, Illinois Department of Revenue spokesman Mike Klemens said.